Guidance on COBRA subsidies under the American Rescue Plan Act

The Internal Revenue Service recently released much-anticipated guidance on COBRA premium assistance under the American Rescue Plan Act of 2021.  Notice 2021-31, issued in the form of 86 FAQs, addresses several topics of interest to plan sponsors, including who is eligible for assistance, reduction in hours and involuntary termination of employment, coverage eligible for the subsidy, the beginning and end of the premium assistance period, the extended election period, calculation of the premium assistance credit and claiming the premium assistance credit. 

This alert describes some of the key aspects of the guidance.

Eligibility for COBRA premium assistance

The guidance confirms that an individual is eligible for premium assistance if the individual (1) is a qualified beneficiary as the result of the reduction of hours or the involuntary termination of employment (other than by reason of gross misconduct), (2) is eligible for COBRA for some or all of the period beginning on April 1, 2021 through September 30, 2021 and (3) elects COBRA continuation coverage.  The notice confirms that this includes qualified beneficiaries who are the spouse or dependent child of the employee.  It additionally confirms that an individual can become eligible for premium assistance more than once.

Self-certification.  The notice clarifies that employers may require individuals to self-certify or attest to their eligibility status with respect to a reduction in hours or an involuntary termination of employment.  In addition, employers may require individuals to self-certify as to their eligibility status regarding other disqualifying group health coverage.  While employers are not required to obtain a self-certification, employers who claim the premium tax credit must retain supporting documentation to substantiate that an individual was eligible for premium assistance.  Employers may rely on individuals’ self-certification unless the employer has actual knowledge that the certification is incorrect.

The IRS guidance also clarifies that premium assistance will be available to an individual until the individual is permitted to enroll in coverage under any other group health plan, including during a waiting period.  Further, if an individual does not elect COBRA and enrolls in coverage under another group health plan, but then ceases to be covered by the other group health plan as of April 1, that prior coverage does not end the period of eligibility for COBRA continuation coverage and does not disqualify the individual from premium assistance.  If an individual is eligible for other non-COBRA group health plan coverage or Medicare beginning on or after April 1, 2021, but fails to enroll in either, premium assistance is not available for periods of coverage beginning on or after the date the individual is first eligible for the other coverage.

The guidance confirms that an individual who is enrolled in Medicare is not eligible for premium assistance, but an individual enrolled in individual health coverage through a Health Insurance Exchange may be eligible for premium assistance.  However, an individual is not eligible for a premium tax credit to help pay for the cost of exchange coverage during any month that the individual is enrolled in COBRA.

If an individual is offered and elects continuation coverage provided voluntarily by an employer under a health plan that is not subject to COBRA, no premium assistance is available to that individual.

The notice also addresses offers of retiree health coverage.  If retiree health coverage is offered under the same group health plan as the COBRA continuation coverage, the offer of the retiree health coverage has no effect on an individual’s eligibility for premium assistance.  However, a potential assistance-eligible individual is not eligible for premium assistance if the individual is offered retiree health coverage that is not COBRA and is coverage under a group health plan that is separate from the plan offering the COBRA coverage.

No premium assistance is available with respect to the portion of a COBRA premium for individuals who are not qualified beneficiaries, such as spouses or dependent children who were not covered under the plan before the qualifying event.  In addition, if an individual does not meet the definition of a qualified beneficiary under Federal COBRA, the individual’s coverage is not eligible for premium assistance, even though the individual may be covered or eligible for coverage under a plan by its terms.

Finally, if an individual elected retroactive COBRA coverage under the Emergency Relief Notices, neither making nor owing COBRA premium payments for retroactive COBRA coverage for which the payment due date has been extended makes an individual ineligible for premium assistance.

Reduction in hours and involuntary termination of employment

Reduction in hours.  The guidance clarifies that a reduction of hours, both voluntary and involuntary, is considered a qualifying event eligible for premium assistance.  This includes individuals who are furloughed, even when there is a reasonable expectation of returning to work or resuming normal working hours.  In addition, an individual is eligible for premium assistance if the individual elects to participate in a “window program,” as defined in Treasury Regulations, which is similar to a furlough.  Lastly, an individual is eligible for premium assistance even when the reduction in hours is due to a work stoppage as a result of a lawful strike by employees or a lockout by the employer so long as both parties intend to maintain the employment relationship.  An individual may also be eligible for premium assistance as a result of a reduction in hours during a leave of absence due to illness or disability if the duration and type of leave would make the individual eligible for COBRA continuation coverage.

Involuntary termination of employment.  The guidance explains the parameters for determining whether there has been an “involuntary termination” of employment.  A termination is deemed involuntary by the IRS depending on the facts and circumstances of each termination.  Generally, an involuntary termination of employment is when an employer independently and unilaterally terminates the employment relationship even though the employee is willing and able to continue working.  The employee’s willingness to continue working means that there can be no implicit or explicit request by the employee to be terminated by the employer.  Moreover, it does not qualify as involuntary termination of employment if the employment relationship is terminated due to a non-renewal of an employee’s contract when there is an understanding between the employer and employee that the employment contract will not be renewed.

Termination due to retirement, disability or death.  Retirement is viewed by the IRS as a voluntary termination of employment, making a retiree generally ineligible for premium assistance.  However, if the employee was willing to continue working and the employee had knowledge that their employment would be terminated absent the retirement, the retirement may be considered an involuntary termination.  A termination while an employee is on a leave of absence due to illness or disability is considered an involuntary termination if the employee was willing to return to work following the period of illness or disability.  An employee’s death is not considered an involuntary termination of employment.  Therefore, spouses and dependent children of an employee who dies would not be eligible for premium assistance. 

Resignation for good reason.  The notice specifies certain scenarios where an employee-initiated resignation may be considered an involuntary termination for premium assistance eligibility.  This includes resignation due to “good reason,” such as a material change in geographic location of employment or a material reduction in hours.  Good reason does not include concerns about workplace safety or another reason for resignation unless an employee can show that the employer’s actions – or inactions – resulted in a material negative change, similar to a constructive discharge claim.  Consistent with this constructive discharge concept, an individual would not be eligible for premium assistance if the individual terminates employment because a child is unable to attend school or daycare due to COVID-19.

For cause termination.  An individual may still be eligible for premium assistance even when terminated for cause but only if the employee would otherwise still be eligible for COBRA coverage.  Accordingly, if an individual is terminated due to gross misconduct, the individual would not be eligible for COBRA coverage and would not be eligible for premium assistance.

Coverage eligibility: benefit plans triggering premium assistance

The Act’s premium assistance provisions apply generally to group health plans other than health flexible spending arrangements under cafeteria plans.  The notice provides more granular clarification, explaining that the premium assistance applies to:

• Vision-only and dental-only plans
• An offer of retiree health coverage, provided the retiree coverage is offered under the same group health plan as the coverage made available to similarly situated active employees – not coverage offered under a standalone retiree plan
• A health reimbursement arrangement (HRA)
• An individual coverage HRA – the qualified beneficiary must still incur and substantiate covered medical care expenses to be reimbursed

The notice clarifies the premium assistance does not apply to:

• An HRA integrated with Medicare
• A Qualified Small Employer Health Reimbursement Account (QSEHRA)
• A different, more expensive plan than the plan the qualified beneficiary was enrolled in immediately prior to the qualifying event, unless the lower priced plan is no longer available

When premium assistance begins

Premium assistance begins with the first applicable period of coverage starting on or after April 1, 2021.   A “period of coverage” is the monthly or shorter period for which premiums are normally charged.  For example, employees and COBRA beneficiaries pay premiums every two weeks and receive a corresponding two-week period of coverage.  If the last two-week period of coverage under a plan during March 2021 is from March 28 through April 10, 2021, with the next period running April 11 through April 24, the premium assistance would begin April 11, 2021. 

The notice clarifies that an individual electing coverage under the extended election period may waive earlier COBRA coverage, including any retroactive periods of unsubsidized coverage starting before April 1, 2021.  An individual can thus elect coverage retroactive only to the subsidized period starting April 1, 2021, or elect coverage prospectively.

If an employer experiences a workforce reduction, and thus is no longer subject to Federal COBRA, premium assistance must nevertheless be made available to individuals who had a qualifying event based on involuntary termination or reduction in hours while the employer was still subject to Federal COBRA.

An election of COBRA coverage may be made after September 30, 2021 as long as the election was made within the 60-day period from the provision of the general notice (for a qualifying event after April 1), or from the extended election period notice (for a qualifying event before April 1.)

When premium assistance ends 

Premium assistance continues until the earliest of:

1. The first date the individual becomes eligible for other group health coverage or Medicare (the individual is responsible for timely notifying the plan)
2. The date the individual is no longer eligible for COBRA continuation coverage or
3. The last period of coverage starting on or before September 30, 2021 ends, even if it extends into October.

When the premium assistance ends, if the individual is still entitled to COBRA, the notice clarifies that COBRA coverage will automatically continue. Timely payment for that unsubsidized coverage will be determined under plan and COBRA requirements as time frames may be extended under applicable emergency relief notices.   

Application to state continuation coverage

The premium assistance credit is available for COBRA continuation coverage as well as “comparable” state continuation coverage.  State continuation coverage will be considered comparable even if the state continuation coverage (i) is provided for a different number of months, (ii) is provided for different qualifying events, (iii) is provided to different qualified beneficiaries and (iv) incorporates different premium maximums.  

Extended election period

Individuals who (i) would be an “Assistance Eligible Individual” if the individual had a COBRA continuation coverage election in effect on April 1, 2021 or (ii) previously elected COBRA continuation coverage and discontinued that coverage before April 1, 2021 must be given an additional opportunity to elect COBRA continuation coverage.  The individual may choose to commence COBRA continuation coverage beginning April 1, 2021 or may choose to commence COBRA continuation retroactive to the loss of coverage.

This extended election period must also be offered to qualified beneficiaries who elected COBRA continuation coverage with respect to some, but not all, available coverages.  Thus, if a qualified beneficiary was offered the opportunity to elect continuation coverage for (i) health and (ii) dental-only and the qualified beneficiary elected dental-only, that qualified beneficiary must be provided an additional opportunity to elect COBRA continuation coverage with respect to health coverage.  Similarly, even if a qualified beneficiary elected self-only COBRA continuation coverage, any previously covered spouse or dependent child must be given an additional opportunity to elect COBRA continuation coverage.  An extended election period may also apply to state continuation coverage if the state continuation coverage incorporates an extended election period and the individual otherwise constitutes an Assistance Eligible Individual. 

Claiming the premium assistance tax credit

The premium assistance credit for continuation coverage may be claimed by the premium payee.  The premium payee is the common-law employer maintaining the group health plan, in the case of a plan that is either subject to federal COBRA requirements or under which some of the coverage is self-insured.  In the case of a multiemployer group health plan, the multiemployer plan is the premium payee.  In all other cases (generally, fully insured coverage subject to state continuation coverage requirements), the insurer providing the coverage is the premium payee.  State and local governmental entities, Indian tribal governments and their agencies and instrumentalities may qualify as a premium payee for these purposes.

The premium payee may claim the credit for all premiums not paid by an Assistance Eligible Individual by reason of the Act for any periods of coverage that began before the date the premium payee receives the potential Assistance Eligible Individual’s election of COBRA continuation coverage. For subsequent periods of coverage, the premium payee may claim the credit as of the beginning of each period of coverage.  If the premium payee learns that the individual is eligible for other group health coverage (becoming ineligible for COBRA premium assistance), the premium payee may no longer claim the credit from that point forward. If an Assistance Eligible Individual neglects to notify the employer or plan administrator that they are no longer eligible for the COBRA premium assistance, the premium payee’s ability to claim the credit is not impacted unless the premium payee knew of the individual’s eligibility for the other coverage.

The credit is claimed by reporting the nonrefundable and refundable portions of the credit, and the number of individuals receiving premium assistance, on the applicable lines of the premium payee’s federal employment tax return (ie, Form 941, Employer’s Quarterly Federal Tax Return). The premium payee may also reduce its federal employment tax deposits – including taxes withheld from employee’s wages – in anticipation of the credit for periods of coverage beginning before the date of the tax deposit. If the anticipated credit exceeds the premium payee’s federal employment tax deposits, the premium payee may also request an advance payment of the credit by filing Form 7200 (Advance Payment of Employer Credits Due to COVID-19) after the end of the payroll period in which the premium payee became entitled to the credit.  The Form 7200 must be filed before the earlier of (i) the day the employment tax return for the quarter in which the premium payee is entitled to the credit is filed or (ii) the last day of the month following that quarter. Any advance payments received by a premium payee in anticipation of the credit for the quarter must also be reported on the employment tax return.

If the premium payee entitled to claim the credit does not have any employment tax liability, the premium payee should claim the credit on the Form 941 for the quarter in which the premium payee becomes entitled to the credit. Any advance payments received in anticipation of the credit should also be reported on the same Form 941, and zeros should be entered on non-applicable lines so that the overpayment amount reported on the Form 941 is the amount of the credit reduced by advance payments received.

Use of a third-party payer to report and pay the premium payee’s federal employment taxes, such as a reporting agent, payroll service provider or professional employer organization (PEO), does not alter the premium payee’s entitlement to the credit, unless the third-party payer is itself the premium payee for purposes of the credit. For example, a third-party payer is treated as the premium payee for purposes of the credit if the third-party payer maintains the group health plan, is considered the sponsor of the group health plan and is subject to DOL COBRA guidance, and would have received the COBRA premium payments directly from the Assistance Eligible Individuals were it not for the premium assistance.  Nevertheless, a third-party payer may report and claim the credit on behalf of a client that is a premium payee in connection with federal employment taxes the third-party payor reports and pays on the premium payee’s behalf. However, to claim the credit on behalf of a client that is a premium payee, the third-party payor must obtain information from its client premium payee that would be needed for the premium payee to claim the credit on its own behalf.  Variations in reporting rules may apply depending on the type of third-party payer the premium payee uses.

In all cases, records substantiating the premium payee’s eligibility for the credit must be maintained by the premium payee (or the third-party payer claiming the credit on its client’s behalf). Records to substantiate eligibility for the credit claimed must be provided to the IRS upon request. The premium payee – and the third-party payer, if applicable – will be liable for employment taxes owed as a result of an improper claim for premium assistance credit.

Conclusion

The guidance answers many of the questions on COBRA subsidies that employers had been asking.  The IRS is aware of additional issues relating to premium assistance that are not addressed in the notice and may issue guidance in the future on those issues.

For advice on these and other employee benefit questions or implications in light of the American Rescue Plan and the coronavirus disease 2019 (COVID-19) pandemic, please contact a member of the DLA Piper Employee Benefits and Compensation group or your DLA Piper relationship attorney.

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